Game Theory and the Greek Economic Crisis
It’s interesting to consider Eurozone economic principle as the context for a game being played by two forces. And this is exactly what the BBC article, “Can Game Theory Explain the Greek Debt Crisis?” attempts to showcase. Recall the Greek Economic Crisis of 2009 (which is still on-going today), Greece is unable to pay their debts to their economic partners (The Eurozone) and may default on their debts. As it remains, the inter-workings of different “players” in this game must consider certain factors in order to maximize their payoffs. In this particular game there are two players, Eurozone (the economic system that’s attempting to account for the debts owed to them by Greece) and Greece themselves (the player that has too many debts to pay and has the problem of defaulting on their debts). What decisions they make in their negotiations could be showcased as a text-book example of game theory (all though I would never presume to understand their economic systems enough to simplify their decision making processes, this is just a thought experiment!)
With each player having a set series of payoffs and strategies, it becomes more obvious what the intended game would look like. For instance, there is the initial strategy presented by Greece with the choice to do 1 of two things depending on their strategy, introduce their “Three point plan” for paying off their debt or defaulting on their debts (BBC, 2015). Depending on what strategy is selected two things could happen, again depending on whether or not Greece decides to default or offer a three point plan.
If a plan is offered, Eurozone could reject the plan which would lead back to the defaulting strategy and the Eurozone wouldn’t be able to collect on their debts harming both teams “on average” (I will get more into what the BBC means by this later) (BBC, 2015). However, Eurozone may accept the plan which means they will get some of their money back overtime and in much less desirable situations while Greece “wins” the game by getting exactly what they wanted (This does have some outward forces such as social considerations and relationship factors that would have an effect on the real-world example, but I will ignore those for now since we haven’t gotten to them in class yet).
If Greece is forced to default on their debts, two things may happen: They may attempt to leave the Eurozone all together (BBC, 2015), which ultimately is a good thing for the Eurozone as described in the article (BBC, 2015), or they could dismantle the Eurozone entirely as it shows to other member economies that it has failed as an effective system, which ultimately is a terrible thing for both parties (hence the previously mentioned “on average” earlier in this blog post).
When presented like this as far as game theory suggests, it becomes more apparent that there actually is a dominant strategy for both players. In order to reach a successful, acceptable payoff for both players while minimizing risk its recommended that not only is it in Greece’s best interests to offer a three-point plan, but also for the Eurozone to accept it (or at least a watered down version of it as described in the article) (BBC, 2015). This entire system is extremely related to our class as real world example of game theory thought and practice in a larger economic sense. It combines the concepts of player decision making, payoffs, and dominant strategies in an example based on relevant and current topics.
Source: http://www.bbc.com/news/magazine-33254857